Could Hospitals Making Generic Assets Impact Teva Pharmaceutical Industries Ltd (ADR) and Endo International plc? Analysts Answer

A NYT article has Wall Street abuzz today with whispers of non-profit hospital groups creating a new generics maker or partnering with third party manufacturers.


Should biotech investors be concerned that hospitals might start making their own generic drugs, manufacturing inspired by steep drug company costs and shortages? That’s the word on the Street, according to a New York Times article: “Fed Up With Drug Companies, Hospitals Decide to Start Their Own.”

Are these worries being blown out of proportion? Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) shareholders certainly do not need any more reason to quake in their boots for a biotech giant already in recovery, and meanwhile, Endo International plc – Ordinary Shares (NASDAQ:ENDP) shares have been taking a 5% beating today in the wake of what could impact the generic injectables market.

Cantor analyst Louise Chen may be sidelined on both biotech players, but even he believes these concerns circling hospitals manufacturing generic drug of their own to dial back costs are to put it simply “overdone.”

Yet, it is worthy of note, “TEVA and ENDP are down the most given their strength in generic injectables, which is what the NY Times article discusses at length,” highlights the analyst.

The backdrop for generics companies in general shows feedback pointing to sterile manufacturing presenting a “very difficult” challenge, Chen writes, adding that a lot of the “highly resourced” giants have frankly “not been successful at it.” Will hospitals be able to “execute over any real time horizon consistently?” This is a query Chen finds “interesting,” as he adds, “We would also note that generic drug approvals and plant inspections take time. So the opportunity for hospitals is likely many years away at best, unless they decided to acquire a generics company.”

As far as Chen surveys the storm of apprehension settling in the biotech-verse today, should a world come to play where hospitals triumph in this initiative, the sector as a whole is not going to face too much of a knock regardless: “Only a handful of small market generic opportunities were mentioned in the article, so we do not think it will impact the industry much, even if hospitals were ever successful in this endeavor.”

For now, the analyst reiterates a Neutral rating on ENDP stock with a $7 price target, which essentially mirrors current trading levels, and maintains a Neutral rating on TEVA stock with an $18 price target, which implies a nearly 12% downside from current levels. (To watch Chen’s track record, click here)

Mizuho analyst Irina Rivkind Koffler likewise throws in her two cents, explaining that the “headline is understandably scary for companies with meaningful hospital injectables businesses like Endo (~20% of 2017 revenues are for sterile injectables) and Mylan ($1.0B in 2016 sales attributed to injectables).”

Yet ultimately, the analyst is unfazed, finding that any “risk to the sector is modest.” In fact, the analyst goes even as far as to wager “the event presents an attractive entry opportunity instead.”

As such, the analyst reiterates a Buy rating on ENDP stock with a price target of $12, which implies a 70% upside from current levels. (To watch Koffler’s track record, click here)

Koffler asserts that even if this endeavor springs to fruition (which she questions), “We think the theoretical impact could be small,” considering the intent is to prioritize “certain drugs only.” All the while, Koffler voices her doubts: “the hospital program may never get off the ground as increased generic competition escalates due to FDA initiatives already underway.”

Keep in mind, the very start up expenses from kickstarting a substantive generics firm could “prove cost prohibitive to hospitals,” the analyst underscores, finding it also “challenging to predict drug shortages in advance and to have those ANDAs approved in time to address the shortage (several years lead time required).”

“We note that FDA already identified off-patent drugs without generic competition and has a policy to expedite review of generic applications for limited competition products, and it is likely that existing generic manufacturers are already actively pursuing these programs, so the supply and pricing of these products should improve in the near future,” contends Koffler, overall believing that the New York Times article “[created] buying opportunities in generics.”